Smith Stone & Knight Ltd v Birmingham Corporation 1939]4 All ER 116 -
October 26th, 2009
Piercing the corporate veil to obtain an advantage. Smith Stone & Knight Ltd v Birmingham Corporation 1939]4 All ER 116
A local govt, BC wanted to compulsorily acquire land owned by SSK. The land was occupied by Birmingham Waste Co Ltd (BWC), that operated a business there. BWC was a subsidiary of SSK.
When the court recognise an agency relationship. If a subsidiary company is acting as an agent for its holding company, it may be bound by the same liabilities and rights of its holding company. However, no court has yet found subsidiary companies liable for their holding company’s debts.
SSK owned some land, an a subsidiary company operated on this land. BC issued a compulsory purchase order on this land. Any company which owned the land would be paid for it, and would reasonably compensate any owner for the business they ran on the land. Since the subsidiary company did not own the land, BC claimed they were entitled to no compensation. The courts held that the subsidiary company was an agent and BC must pay compensation.
Issues: whether BWC was entitled to compensation from the local govt. Whether BWC was an agent for SSK.
Held: that six requirements must be established before the Salomon principle could be disregarded to support the finding that a subsidiary carried on a business as agent for its holding company.
The court lifted the veil of incorporation to find out the ownership of the waste paper business and the ownership of the land, which the waste paper business was operated. The court found out Smith, Stone& Knight Ltd, a holding company did not transfer ownership of waste paper business and land to Birmingham Corp. Therefore, the waste paper business was still the business of parent co& it was operated by the subsidiary as agent of the parent co.
The profit of the subsidiary must be treated as the profits of the holding company
The persons conducting the business must be appointed by the holding company
The holding co must govern the venture and decide what should be done and what capital should be embarked on it
The profits of the business must be made by the holding company’s skill and direction
The holding co must be in effective and constant control